Despite Low Unemployment, Employers Don’t Plan to Boost Bonus Budgets

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As average salary for budgets for 2019
remain little changed at about 3 percent growth despite falling unemployment, employers continue to leverage variable pay such as annual bonuses to reward and motivate employees—even as the percentage of payroll budgeted for incentive pay holds steady.

In other words, the incentive pay pie might not be much sweeter next year, but with
rising prices erasing average salary increases altogether for many workers, performance-based bonuses still help to promote employee engagement, especially for top performers.

Performance-Based Bonuses

A combination of awards based on both organi­zation or work unit success and individual performance remains the most common approach within variable pay programs, according to the
WorldatWork 2018-2019 Salary Budget Survey, conducted through May 2018 with 2,031 U.S. responses, mostly from large North American companies. The findings were published at the end of July by WorldatWork, an association of total rewards professionals.

Some 85 percent of U.S. employers gave out performance-based bonuses or other forms of vari­able incentive pay in 2018, the survey shows, and the amount of variable pay budgeted and paid out, for all employee categories, has been stable for several years.

When total rewards professionals were asked about their variable pay budgets for 2019, their responses were virtually unchanged from the amounts budgeted for this year and, as shown below, for 2017.

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Variable Pay Budgets

Budgets for variable pay awards, representing a median percentage of base pay, differ based on employee classifications. Individual rewards within these groups will vary based on an employee's job performance rating.

Nonexempt Hourly Nonunion

Nonexempt Salaried

Exempt Salaried

Officers/ Executives

2019 average percent budgeted (projected)

5.2%

6.1%

12.6%

38.2%

2017 average percent budgeted

5.1%

6.0%

12.5%

38.1%

Source: WorldatWork 2018-2019 Salary Budget Survey.

"Bonus and incentive awards must be earned by the employee each year, so they tend to have a greater impact on the performance of the individual than a merit-based pay increase," said Alison Avalos, director of membership and total rewards strategy at WorldatWork. "This prevalent use of variable pay, or pay-at-risk, is expected to continue as the most successful organizations are always looking to maximize return on their rewards investment dollars."

But while the use of variable pay remains a popular way to for employers to motivate and retain their workforces, "it's not a trendy space," Avalos admitted. "Bonus and incentive awards of all types have become staple elements to any competitive rewards package."

A likely reason why these programs aren't changing much "probably has more to do with the creative and customized use of other rewards programs," Avalos explained. "Leading organizations that have success in attracting, motivating and retaining talent today recognize the importance of a stellar work experience," and top talent is looking for an employer with not only competitive base and variable pay programs but also attractive health care options, well-being programs, flexibility, paid time off and "all the intangibles of a great work environment, such as development opportunities and organizational purpose that aligns with individual values," she said.

New findings from consultancy Willis Towers Watson also show that annual short-term incentive bonuses—which are generally tied to company and employee performance goals—are projected to hold steady or decline slightly in 2019 for most employee groups at U.S. companies.

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Short-Term Incentive/Bonus

Average short-term incentive/bonus as a percent of total base salaries.

However, companies are projecting that discretionary bonuses—generally paid for special projects or one-time achievements—will average 5.9 percent of salary for exempt employees, slightly more than the 5.7 percent that companies budgeted for this year and up from 5.3 percent in 2017. Slightly larger discretionary bonuses are planned for managers and salaried, nonexempt employees.

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Discretionary Bonus Awards

Average discretionary bonus awards as a percent of total base salaries.

"Companies have been able to hold the line on raises ... while at the same time focusing on variable pay such as annual incentives and discretionary bonuses to recognize and reward their best performers," said Sandra McLellan, North America Rewards business leader at Willis Towers Watson.

"A growing number of companies are coming to grips with the fact that employees are more willing to change companies to advance their careers and to talk openly about their pay," she noted. "As a result, organizations are facing increased pressure entering next year to devise a focused strategy and plan on how to allocate their precious compensation dollars or risk losing some of their best talent."

Determining Short-Term Incentive Pay

Short-term incentive plans rely on both individual and organizational metrics, according to New York City-based compensation firm Empsight's new
Policies Practices & Merit Survey Report. The findings are based on mostly
Fortune 500 companies in the firm's client database (73 percent with revenues above $5 billion).

Simpler Incentives at Smaller Firms

"There continues to be focus on reducing the complexity of short-term incentive design and establishing a more rigorous process for setting company and individual performance goals," Willis Towers Watson
reported earlier this year. Other research shows simplicity is especially valued when implementing broad-based employee incentives, particularly at smaller organizations.

"Most small and midsize companies lack a sophisticated compensation team to design, monitor and communicate complex incentive plans," said Michele Kvintus, client manager at PayScale, a Seattle-based pay consultancy.

Smaller organizations do less of every kind of variable pay except for profit sharing, where small and midsize organizations outpaced their larger counterparts, according to PayScale's 2018 Variable Pay Playbookreport, released earlier this year. The report drew on the firm's survey of 7,100 pay managers at companies of all sizes, conducted in November and December last year.

"Profit sharing incentive plans that deliver cash to employees based on company profitability are terrific for small and midsize companies because they don't require intensive design work. It's also easy to explain a profit sharing incentive plan to employees," Kvintus said.

These programs "provide a look back after the close of a business year and foster a 'we grow, you share in it' perspective," she added. "For small to midsize companies, a business-owner mentality among employees is frequently a key factor" for engagement.

Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.